Important legal information about the email you will be sending. By using this service, you agree to input your real email address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an email. All information you provide will be used by Fidelity solely for the purpose of sending the email on your behalf. The subject line of the email you send will be "Fidelity.com: "

Longer-term rates to go up?

As traders weigh the outlook for Federal Reserve monetary policy, implied forwards suggest the Treasury yield curve may steepen over the next year. Some investors expect about a 10 basis point steepening in the 2s10s curve, while the 10s30s could remain relatively stable. The yield curve tends to steepen as the market anticipates policy easing and continues its upward trajectory into recessions.

Source: Bloomberg. Shaded grey areas indicate recession periods.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

US factory gauge falls most since 2008

American manufacturing slumped last month by more than forecast amid a growing trade war with China, according to a recent report from the Institute for Supply Management. The factory index (i.e., Manufacturing PMI) declined to a 2-year low of 54.1 from 59.3 the prior month. The 5.2-point drop has been exceeded just twice this century—both during recessions (the financial crisis a decade ago and following the September 11, 2001 terror attack). However, manufacturing activity remained in expansion territory (above 50).

Source: ISM

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Shutdown impact seeps in

A prolonged US government shutdown is likely to impact labor markets and capital spending (i.e., capex), the latter of which was down in at least 2 measures of expectations in December. Readings for Richmond Fed Manufacturing Survey expected capex and NFIB Small Business Optimism capex plans have extended their recent decline in the wake of the shutdown that began roughly a month ago.

Source: Federal Reserve Bank of Richmond, National Federation of Independent Business

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Bond supply worries may be overblown

Some investors have attributed a recent slump in Treasuries, in part, to the weakest auction demand in years for 5-year US notes. This development would align with concerns about the surging supply of federal government debt. However, other data shows little relation between supply and yields. While the amount of Treasuries outstanding has surged by almost $3.7 trillion since the start of 2014, yields today aren't much different than back then—even as foreign investors have been steadily turning away from the US Treasury market.

Source: US Treasury, Bloomberg.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Rising gold holdings a warning sign?

Amid the recent bout of market fears, investors have poured money into gold-backed exchange-traded funds (ETFs). Worldwide ETF holdings of the yellow metal—which in October had hit the lowest level in more than a year—surged by greater than 100 metric tons, as of early January. That rapid inflow helped boost gold to the highest price since June.

Source: Bloomberg, as of January 1, 2019.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Fed in focus

In December, the Federal Reserve raised its benchmark rate for the 4th time in 2018. The Fed's "dot plot," which the US central bank uses to signal its outlook for the path of interest rates, shows that policy makers expect 2 rate increases in 2019, based on median projections.

Source: Bloomberg

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

GDP growth still strong

While the US economy hasn't been able to match the near-term high set in 2014, it is still chugging along. Gross domestic product climbed a better-than-expected 3.5% in the third quarter on strong consumer and business spending, according to Commerce Department figures. The annualized rate of gains marks the best back-to-back quarters of growth since 2014.

Source: Commerce Department

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

At oil's mercy

While there are many other factors that contribute to recessions, the correlation between an economic downturn and oil being expensive in real terms is striking. As the chart shows, there has been a historical correlation when the real price of oil becomes expensive relative to prior years. Oil has traded between $50 and $77 per barrel this year.

Source: Bloomberg, Morgan Stanley Wealth Management GIC. Note: Performance is based on data from 1983 and later; extreme period is denoted by a WTI/Bold reading below 0.05.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Corrections are common

It’s understandable to get spooked by a significant stock market drop. However, the reality is that they are quite common, and those losses are usually erased in a modest period of time. Since the beginning of the current bull market that began in March 2009, there have been 15 corrections (a price decline of 10% or more), including the one that occurred in October of this year. More often than not, all those losses are erased within a month or so. Of course, risks remain for individual stocks.

Sector selection

According to the business cycle theory of investing, different sectors tend to perform better depending on the stage of the economic cycle. Fidelity believes we are currently in the mid to late stage of the business cycle—which has tended to be positive for the energy, industrials, materials, and communications (formerly telecom) sectors. Of course, each cycle is unique, and individual investment performance can vary.

Source: Morgan Stanley Wealth Management GIC.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

How long will this bull market last?

The stock market can be viewed through the lens of multiyear periods, or "structures," in which stocks move in a particular direction. Taking this structural view of the Dow Jones Industrial Average, for example, you can see that there have been 8 significant market cycles (depending on how you identify the beginning and end of each cycle). The chart below from Morgan Stanley shows that each cycle has lasted 14 years on average, and the most recent bull market—which began a few years after the nadir of the financial crisis—has lasted for roughly half that average period of time.

Source: Bloomberg, Morgan Stanley Wealth Management GIC.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Timing the market

"Fear and greed" is one of the oldest stock market adages that suggests investors can be driven to act by emotion, rather than out of sound planning. As the charts below show, a significant amount of net money has flowed into and out of US stocks at inopportune times.

Notes: Net new cash flows to domestic equity is measured by the dollar value of new sales minus redemptions, combined with net exchanges. Yearly returns are represented by the total returns of S&P 500. Source: Investment Company Institute, Haver Analytics, Bloomberg, Morgan Stanley Wealth Management GIC.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Election season and stocks

While much is often said about how stocks perform depending on who controls the White House—and Congress—data since 1955 shows that the stage of the business cycle matters significantly more. Indeed, large returns (losses) have correlated with recovery/expansionary phases (downturns) of the business cycle to a greater extent than which party controls Washington DC.

Source: Bloomberg, Morgan Stanley & Co. Research, NBER, Haver Analytics. The Morgan Stanley Cycle Indicators measure the deviation from historical norm for macro factors including employment, credit conditions, corporate behavior and the yield curve. The repair phase occurs due to the lag time between when these factors are beginning to improve and when they turn positive.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Workers getting a smaller slice

In the wake of the US tax cut that was implemented in 2018, workers continue to get a thinner slice of the American economic pie, even as growth strengthens, hiring remains robust, and corporate profits are increasing. Labor's share of income of US non-farm businesses—reflecting salary and other employee compensation—fell to 56.5% in the second quarter, down from the prior 3 months and below a year earlier, according to the Bureau of Labor Statistics. Several reasons why some attribute the share continuing to decline to new lows include technological advances, globalization, and workers' waning bargaining power.

Source: Bureau of Labor Statistics

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Big divide among income earners

Outlook among Americans who make more money is pulling way ahead of those making less. People making more than $50,000 a year were the most upbeat since 2001, lifting their confidence index to 76.8, the Bloomberg Consumer Comfort survey recently showed. The gauge for those earning less than $50,000 annually fell to a five-month low of 39.4, putting the sentiment gap at 37.4 points, the largest gap since 2010.

Source: Bloomberg Consumer Comfort weekly survey

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Not a good time to buy a home?

Americans are increasingly discouraged by rising borrowing costs and property-price appreciation that's outpacing wage growth, according to a recent University of Michigan consumer sentiment survey. The share of those surveyed who think this is a good time to buy a home plunged in August to 63%, the smallest amount since 2008. That decline is consistent with the recent cooling sales of existing and new homes.

Source: University of Michigan: Freddie MacCharts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

A growing hunger

Spending at US restaurants surged over the past 3 months by the most on record, making it both a bright spot for the economy and a risk for restaurants and related companies if appetites for eating out weaken. Sales at food service and drinking establishments rose 1.3% in July to $61.6 billion, the Commerce Department reported. That brought the 3-month annualized gain to 25.3%, the fastest pace since the early 1990s.

Sources: Bloomberg, US Commerce Department.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

The longest bull market ever

Since global markets bottomed on March 6, 2009, stocks have recaptured losses from the financial crisis, and then some. This is now the longest bull market on record at more than 3,480 days, as of early October. The tech-heavy Nasdaq has vastly outpaced other major global market indexes during this rally. However, even though this is longer than the last bull market which persisted for most of the 1990s, it hasn't been stronger. The S&P 500 rose 323% from its low in March 2009 through early October (for an annualized gain of 16.5%). That advance trailed the index's 417% jump from a low in October 1990 through the March 2000 high (a 19% annualized gain).

Sources: Bloomberg, FactSet. Left chart is indexed so that 100 = March 9, 2009.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Paycheck squeeze

Real US wage growth is getting flattened amid the highest core inflation in a decade. Average hourly earnings adjusted for inflation fell 0.2% in July from a year earlier, the lowest print since 2012, Labor Department data revealed. A separate report from the Labor Department showed that core consumer prices jumped 2.4% year-over-year, the biggest advance since September 2008.

Weak real US wage growth compounded by rising inflation

Source: Bureau of Labor Statistics

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Stocks significantly overvalued based on one measure

The S&P 500's price-to-sales (P/S) multiple is approaching dot-com era highs, suggesting the market may be expensive at current levels. Its trailing 12-month price-to-sales ratio surged to 2.25 recently, the highest since early 2000. And it’s not just tech giants skewing the data: The median P/S ratio for index members is more than twice the level of the dot-com peak.

Source: Bloomberg

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Stock buybacks could set record

Goldman Sachs' Buyback Desk estimates that stock buybacks—a company's repurchase of its own shares—could exceed their previous estimate of $800 billion to reach $1 trillion this year. Spurred on in large part by the corporate tax cut enacted earlier this year, that would be the largest annual buyback amount ever and has been a major factor supporting stock prices this year.

China trade gap at new record

Amid rising trade tensions, the US trade deficit with China recently hit an all-time high. Tariff talk has been a primary driver of near-term market unease, and a rising deficit may serve to further fuel the effect.

Sources: Bloomberg, China Customs General Administration

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

A map of exports

Amid rising global trade tensions, all countries involved in trade disputes would be effected by the implementation of tariffs. The map below shows each country's total value of exports. Unsurprisingly, the world’s 2 largest economies—the US and China—are also the 2 largest exporters of goods and services.

Confidence gap between generations widens

On its surface, consumer confidence appears to be strengthening. However, the generation gap is widening. Older Americans, who tend to be more established in their careers, are upbeat about the economy. At the same time, confidence among younger Americans is the lowest since September 2016. As the lower half of the chart shows, this has fueled a record-wide spread in confidence between those under 35 and those in the 35-to-54 age group, according to Conference Board data.

Source: Conference Board

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Convertibles in style

Issuance of convertible bonds—those that can be converted into stock at an agreed upon time and price—is on track to hit $50 billion this year, potentially the greatest volume since 2007. Tax code changes, namely the limitation of interest deductibility, and stock market volatility, have helped drive supply of these bonds (which are a cheaper source of funding to the borrower than traditional debt). Twitter’s recent $1 billion convertible bond offering propelled year-to-date issuance to more than $20 billion, according to Bloomberg.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Building equity

One measure from the Federal Reserve reveals Americans have finally recouped the equity they lost during the housing collapse, thanks to a steady run-up in property values. Homeowners’ equity as a share of household real estate assets rose in the first quarter to 59.7%, matching the late-2005 peak (although it’s been in a long-term decline since 1945).

Source: Federal Reserve

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Coal continues decline

As a percentage of its contribution to US power generation, coal has slipped below where it was before the 2016 presidential election. As of early June 2018, coal produced just 24% of America’s power mix, according to the Energy Information Administration. That’s roughly 5% below coal’s market share in November 2016 (and about half its market share during the early 2000s). Cheaper natural gas and growth in renewables have been the primary reason for coal powering down.

Source: US Energy Information Administration

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Growth stocks outpacing value

Growth stocks have historically outperformed value, excluding the 15 years prior to 2003, during which value outperformed growth for much of the period. In recent years, investors have been buying more growth stocks than value stocks, despite increasingly higher valuations. Growth stock relative valuations are in the 70th percentile, whereas value stocks are in the bottom quartile.

Source: Bloomberg Finance, WSJ, as of May 31, 2018.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Volatility has risen

In recent months, volatility hasn't been nearly what it was during the market downturn in late January and early February. However, volatility as measured by the S&P 500's percent of trading days with a greater than 1% move (up or down) suggests 2018 is on pace to be more volatile than the average annual volatility of the past 8 years. Moreover, US markets have been increasingly volatile at the open each day.

Dominance of technology

If you are looking for a source of the US stock market's momentum during this multiyear bull market rally, look no further than FANG stocks—Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOG). The FANG group is often cited in financial media as a benchmark of new tech. If you add Microsoft and Apple to this group, you can see how significant they are to the global economy. The combined market value of just these 6 companies recently topped $4 trillion. That represents 5% of the value of all publicly traded companies worldwide. Of course, there is the possibility that these company values may be trading at valutions not justified by their underlying earnings.

Source: Bloomberg

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Rising financing costs impact housing market

Rising borrowing costs are slowing the rate at which US homeowners are refinancing their homes or turning to home equity for cash. According to a recent report by the Mortgage Bankers Association, mortgage refinancing volume fell to its lowest point since December 2000. Refinancings now represent just 36% of all mortgage applications, the lowest share since September 2008.

Source: Mortgage Bankers Association

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

The US economy without debt

Debt can help fund productive increases in economic activity and output. Without debt, global economic activity would be substantially lower. However, many investors do not realize how significantly government debt contributes to the US economy. In the chart below, the black line represents the difference between US GDP growth and new US government debt. A noteworthy takeaway from this chart is that, if you subtract debt, US GDP has not seen positive growth since 2000, and the economy actually shrank every year since the financial crisis.

Source: FactSet, 720 Global, Mauldin Economics, as of May 1, 2018.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Oil prices rise amid supply concerns on the Iran deal

For the first time since 2014, oil prices climbed above $70 per barrel recently. One driver of the price increase was the US decision to pull out of the Iran deal. In the wake of sanctions being removed in 2015, Iran became the 3rd biggest exporter of crude oil (nearly 4 million barrels per day) within the Organization of Petroleum Exporting Countries. Energy prices are a major cost for a wide range of industries, from airlines to shipping companies, and are a component cost of most other types of businesses.

A reason stocks are moving sideways

Some investors compare the market's earnings yield (the inverse of the price-to-earnings ratio) to the yield on the 10-year Treasury note to assess the relative value of stocks. Despite the S&P 500 Index's earnings yield being up 50 basis points (0.5%) from its January 26 low, the gap between that and the 10-year yield has only increased 5 basis points (0.05%). This suggests that stocks have not improved in terms of relative value.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Caution signs in Europe?

The Purchasing Managers' Index (PMI) for the eurozone declined for the fourth straight month in April. While still positive (a PMI over 50 indicates expanding manufacturing), it has declined substantially from the short-term high reached in late 2017. This follows a weaker-than-expected first quarter 2018 GDP report for the eurozone. Investors in European markets may want to keep a watchful eye on future manufacturing reports for the region.

How corporations are using their cash

Since the financial crisis, the percentage of corporate cash spending on dividends, buybacks, and acquisitions increased significantly. Meanwhile, investment by companies (Capex) has been trending down.

Source: Evercore, ISI, as of January 1, 2018.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Are consumers overconfident?

Consumer confidence continues to set fresh highs, continuing a long-term trend since the financial crisis. Some contrarians worry that many are ignoring the bouts of volatility, the threat of rising inflation, and geopolitical uncertainty. Looking back over the past 40 years, consumer confidence has historically plummeted 1 year before a recession begins, on average.

Source: Strategas, as of 4/24/2018

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Manufacturing remains strong

Even though the US Purchasing Managers' Index (PMI) dropped slightly month-over-month in March to 59.3, it still remains in expansion territory (anything over 50 implies manufacturing growth). As the chart shows, PMI tends to track with S&P 500 earnings—the most important driver of the stock market.

Source: Strategas, as of 4/02/2018

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Inflation ticks higher

Some market indicators reveal inflationary pressures are on the rise. Indeed, inflation expectations have risen to the highest point since 2014, as measured by the US 10-year breakeven (a measure of expected inflation derived from 10-year Treasury Constant Maturity Securities and 10-year Treasury Inflation-Indexed Constant Maturity Securities). Meanwhile, the Bloomberg Barclays Global Aggregate Index yield rose above 1.9% recently, the highest point in 4 years.

Source: Bloomberg, as of April 26, 2018. The Bloomberg Barclays Global Aggregate Index is a multi-currency benchmark for global investment grade debt including treasury, government-related, corporate, and securitized fixed-rate bonds from developed and emerging markets issuers.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

US trade gap grows larger

The US trade deficit widened in February to a larger-than-forecast $57.6 billion, the highest since October 2008, according to the Commerce Department. Imports and exports both registered gains of 1.7%.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Traders still think rates are going up

The Federal Open Market Committee's March meeting suggested the central bank is leaning toward a slightly faster pace of tightening. As of mid-April, traders are pricing in an 80% probability that the Fed will raise rates in June, according to federal funds futures.

Source: Bloomberg, as of April 17, 2018.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Cracks in the housing foundation

The National Association of Realtors recently reported the median price of previously owned homes was 41% greater than it was just 5 years ago. That coincides with just a 12.6% rise in average hourly earnings by workers over the same period of time. With mortgage interest rates having been on the rise, having reached the highest rate since 2014, housing affordability may be a real issue entering the busiest season for home buying.

Source: National Association of Realtors, Bureau of Labor Statistics, as of February 22, 2018. AHE TOTL Index (US Average Hourly Earnings All Employees Total Private SA). Data is normalized as of January 1, 2013.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

US factory utilization has room to grow

Capacity utilization at American factories remains below the long-run average. According to the Federal Reserve, plant use rate rose to 76.9% in February, which is more than 1% below the average over the past 45 years. It has yet to recover fully to pre-recession levels.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

US consumers expecting higher wages

After years of stagnating wage growth, Americans are more optimistic than they have been in years. US consumers anticipate their earnings will rise 2.73% in the coming year, the most since data collection began in 2013, according to the results of a New York Fed survey. January was only the third month in the survey’s 56-month history in which expected wage growth topped expected consumer price inflation, which fell slightly, to 2.71%.

Source: Federal Reserve Bank of New York, US Department of Labor, as of March 7, 2018.

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.